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Published on: October 25, 2012
What’s Wrong, and How to Fix It, Part 3: Corruption/Plutocracy

A reasonably sentient reader might think that between globalization/automation causes and our political/institutional dysfunction, there is nothing left to account for in order to explain what’s wrong with the United States these days. That would be wrong. In my view, more of the variance that explains our parlous present circumstances lies in this third group […]

A reasonably sentient reader might think that between globalization/automation causes and our political/institutional dysfunction, there is nothing left to account for in order to explain what’s wrong with the United States these days. That would be wrong. In my view, more of the variance that explains our parlous present circumstances lies in this third group then in either of the first two. Globalization and automation have upset our apple cart faster and more profoundly than we’ve been able to set it upright again, and institutional/political dysfunction has mightily compounded the problem. But both aspects involve a pervasive corruption, without which these problems would not be nearly so formidable, and would be dramatically easier to repair.

This isn’t easy for me to say. Throughout the Cold War arguments about sleazy capitalists came in the main from left-wing admirers of statist policies, entrepreneurs of envy most every one of them, if they did not come from outright Soviet propagandists and agents. I was not so naive as to suppose that market systems are impervious to corruption, but I believed that a natural level of corruption was counterbalanced by a range of institutional and broadly moral norms that kept it in check.

I still believe that. During the Cold War we did not have a corruption problem of the magnitude we do now. In this regard I credit H. W. Brands’s argument that national security crises, especially protracted ones, have a way of making us behave less selfishly than we otherwise might. Brands argued in a 2001 book called The Strange Death of American Liberalism that there has been an indelible connection between the willingness of the American body politic to develop and sustain a larger social idea and the presence of a national security threat. When we come together to meet a foreign challenge, our social juices well up and trust fills our cups to the brim, enabling government to enlarge its welfare functions. When we perceive that the foreign challenge has been met, we Americans revert to our traditional jaundiced attitude toward central authority. In other words, there could have been no Great Society program had there not been a Soviet threat.

This sounds counterintuitive at first, but on reflection it makes a lot of sense. In the present context, the argument can be taken to mean that Americans did not dare act in selfish and shortsighted ways when a clear and present danger hovered just off our shores, but that once that danger seemed to dissipate with the fall of the Berlin Wall, the underlying short-term mentality of the “flip-it” real estate deal began to ooze its way into nearly every nook and cranny of American economic (and political) behavior.

It’s hard to date the burgeoning of this problem. It’s not as though one day things were firmly under control and the next day they went kablooey when nobody was looking—although I confess that that is how it sometimes seems to me. George Packer dates the inception of the present phase at 1978.1 That year, he claims, marks the rise of organized money. He blames both conservative intellectuals and post-Watergate McGovernite reformers for opening the political process to wads of cash from all over the place. In what he shrewdly calls a story about the perverse effects of democratization, Packer argues that the electorate was transformed from coalitions of different blocks to an atomized nation of television watchers: “Politicians began to focus their energies on big dollars for big ad buys.” So here is another link between schools: Technology has not only helped to stultify our national political conversation, it also abetted corruption by making it attractive to channel enormous sums of money into electoral politics. Packer picks 1978 because three bills came before Congress that year, all of them perfectly sensible, and all of them were defeated by the new power of organized big money.

One could as easily choose 1994, the year the Republicans won the House of Representatives, all the committee chairmen flipped, and Newt Gingrich became Speaker of the House. These Republicans managed in just two or three years to far eclipse the corrupt accretions that took Democrats more than two decades to amass. The Democrats in the main built the troughs of big government, but corporate-friendly Republicans truly excelled in knowing how to sup at them. Or one can, as I do, think of 1978 as “ignition”, 1994 as “lift-off”, and the 1999 passage of the Financial Services Modernization Act (a.k.a. the Gramm-Leach-Bliley Act) as entry into orbit for the most recent visitation of American plutocracy.

That latter datum also marks the true entry of financial industry lobbying within the broader framework of corporate lobbying, and it is that development, arguably, that has done the most harm, as the banking sector itself, for a variety of reasons, has turned from an institution based on helping to create value into one that makes its money on creating debt. It also is the key fact connecting the globalization/automation dimension of the problem with the corruption/plutocratic dimension.

The U.S. financial sector loves globalization and automation. It facilitates the globalization of investment strategies from which the financial elite profits. It facilitates the process of sending corporate investments abroad and simultaneously weakening the power of American labor unions, which keeps corporate profits high—and many banks are actually owned by larger corporations. In essence, as James Kurth has put it, financial plutocracies prefer investing in old industries in new places to investing in new industries in old places—that was true of Britain in the 1920s and 1930s, and it is true in the United States since the late 1990s.2 The same goes for automation; whatever keeps labor costs down benefits the corporate sector and thus the financial sector ultimately, as well. What did corporations and banks do with their burgeoning profits? In part they plowed them back into the policy process via lobbying to gain even more subsidies, tax breaks and credits for a development that was hollowing out American manufacturing and therewith destroying huge swaths of the middle class.

Of course, the obsession to free the movement of capital, at its height during the “Washington Consensus” Rubin-Summers tenure in the Treasury Department during the Clinton Administration, caused huge havoc during the 1990s—in Mexico (twice), in Russia and, most of all, in Asia. It seems never to have occurred to these high-octane global capitalism boosters that what we really needed was some sort of speed limit for globalization, a limit that did not allow flooding capital into societies still based on pre-modern patrimonial arrangements and that, when it came to banking and financial structures generally, were woefully under-institutionalized. But despite the Asia crisis and lesser examples of similarly caused economic mayhem, American banks made out well overall in the shaky 1990s, and so did most enlarging European ones against whom large American banks felt they needed to compete. For the banks, pedal-to-the-metal, all the way to riches galore was the way to go, pedestrian and other casualties be damned.

Packer does not go into it, but he might have mentioned, as others have, that it was around this time, between the late 1970s and the early 1990s, that the direction of the flow of money in American politics changed. It used to be that the major party organizations would help selected candidates for office, so that money most often flowed from the top down. That enabled the national political committees, more or less controlled by their most senior members, to enforce party discipline. When prominent politicians, aided by sophisticated campaign consultants, began to raise large sums of money themselves, this flow changed. Political celebrities were expected then to pass money up to the national committee level. Obviously, it became much harder to control what these political heavy hitters said and did, and how they voted. Party discipline suffered.

The advent of big money in American politics, therefore, changed a great deal, and this happened at a time when the technology of campaigning grew more sophisticated, so that spending lots of money on something considered newly valuable in electoral battles seemed to make sense. From that day we have never looked back: The cost of national and statewide political campaigns has continued to explode ever since, up 525 percent just since 1983 by one count.

Packer also fails to mention another trend that flows heavily into the money-soaked politics he describes. As libertarians never tire of pointing out, and in this case one can’t help but sympathize with the argument, the more that the Federal government takes upon itself to do, the more rent-seeking opportunities it offers in the process. The larger the number of transactions the Federal government engages in, the longer and deeper the supping troughs, in other words. So if we want to reduce the power of money in national politics, we need to reduce the volume of what is worth buying by curtailing what the Federal government presumes to do.

As ought by now to be crystal clear, I am no libertarian. Indeed, there is a type of lighter-than-air libertarianism that sees no function for government at all outside of seeing to national security and providing for internal law and order. Some of the people who swear by this kind of thinking, which they frequently associate with the foul-spirited rantings and bad novels of Ayn Rand, seem to think that markets fall out of the sky pure and pristine. It apparently has not occurred to them that all markets, always, have been defined and operated within political parameters. Even the concept of private property is, after all, a political idea. Nevertheless, this observation about the relationship between the volume of government transactions and the potential for rent-seeking behavior is irrefutable. Nor does one have to be a libertarian to take the point. The aforementioned William Graham Sumner understood this a century and a half ago, and his grasp of political economy was far too sophisticated to be pigeonholed into any current-day school-of-thought category.

***

I’m less interested in precisely when this plutocratic metathesis occurred than I am in its nature and present condition. Before we can further discuss corruption and plutocracy intelligently, however, we must define what we mean by these terms.

I do not mean by corruption only the passing around of literal bribe money. That is actually quite rare in American politics at the national level. It is not everyday, thankfully, that a Congressman is found with tens of thousands of dollars in cash in his freezer. I mean by corruption instead the systematic caging of campaign contributions for votes.

Now, as recently as the late 1970s, money bought access, not votes; and since lobbyists with different points of view could buy access, no one was particularly advantaged by it. Some Congressmen honestly believed, and many still do, that without lobbyists they couldn’t do their jobs well, since lobbyists provide a convenient way to learn about some highly technical subjects. To some extent this was and remains true, but there’s a big difference between lobbyists who try to persuade Congressmen to adopt their point of view on some issue and lobbyists who function mainly as designated campaign war-chest fundraisers.

There were examples of quid pro quo years ago, too, of course, but in the mid-1970s those usually involved very small sums of money, compared to what goes on now. Now the money does buy votes, especially on low-salience issues, and it does so in part because, again, the financial demands of running successful political campaigns have skyrocketed.3 And that is where the logic of lobbyists cum fundraisers comes from. Incumbents used to have a pretty good idea of what a campaign was going to cost, but now, in the post-Citizens United era, no incumbent knows how much money the other guy is going to spend or even who he’ll raise it from—thus the compulsion of the permanent campaign. Candidates spent something like $9.8 billion in television advertising alone in 2012 which, whatever else it does, creates very rich people in the mainstream electronic media (and thus potential plutocrats).

To get an idea of the scale of change, consider that it cost Jimmy Carter and Gerald Ford about $35 million each to run for President in 1976; the 2012 campaign cost each side about $1 billion, and that’s not even counting super-PAC money.4 Where else are politicians supposed to get this kind of dough, except from rich people, cash-flush corporations, dues-laden large unions, and their lobbyist delivery boys? Is it any wonder that this money comes with implicit, if not explicit, strings attached? A person would have to be naive to the point of downright doltish to claim otherwise. It is as Bob Dole deadpanned many years ago: “Poor people don’t donate to political campaigns.”

Not only that, money doesn’t just buy votes these days; it buys the texts of laws and regs. Corporate lobbyists actually provide congressional staff with specific language, often lots of it, and sometimes these days they do it while literally sitting in House and Senate office buildings—sometimes as lobbyists and sometimes as former lobbyists turned Capitol Hill staffers. Liz Fowler, a former head lobbyist for Wellpoint and a staffer for Senator Max Baucus, wrote the basic draft of the Obamacare bill. Julie Chon, a former J.P. Morgan analyst, wrote large chunks of the Dodd-Frank banking legislation while working for Dodd. A pristine revolving-door example of a contracting scam, rather than the writing of a law or a reg, concerned former Secretary of DHS Michael Chertoff. When Chertoff left government he became a lobbyist for Rapiscan, and was instrumental in getting Rapiscan full-body x-ray scanners installed at airports. These machines may not be safe, especially for pregnant women, and there’s no evidence they actually work to stop terrorists. But the government bought them anyway.

Some industries in effect pool their lobbying efforts, thus acting as oligopolies, at least in this sense if not also others. Oil and automotive companies are famous for this, and of course their lobbying is connected, since cars and trucks run on oil. Ferocious and longstanding lobbying in and out of concert by these two oligopolistic forces explains why we still have a petroleum monopoly in transportation fuels, which has proved not only expensive but deeply harmful in terms of our environmental, balance-of-payments and foreign policy portfolios.5 From the original diesel engine, which was designed to burn practically anything to vastly more efficient internal combustion engines to the electric cars we could have had many decades ago to the flex-fuel cars we can easily and inexpensively have now but for the law, this extremely effective lobbying effort has retarded innovation and enriched these industries at the expense of everyone else—except the regimes and (some) citizens of OPEC countries, of course, and a few present-day Russians, who benefit handsomely if indirectly from this particular form of American corruption.6 It also “trains” those who would be President, especially Republicans and certainly including Mitt Romney, not to advocate energy policy strategies that deviate from the plutocratic agenda.7

My favorite recent example of corporate lobbyists writing legislation and narratives about it simultaneously, and of how matter-of-factly such outrages have become, goes back to November 2009. That’s when it came to light that Genentech lobbyists had provided health care policy talking points to the staffs of several House members that made their way verbatim into the congressional record via the identical official statements of a clutch of Representatives. Genentech had earlier poured many dollars into these Representatives’ campaign coffers. But Evan L. Morris, head of Genentech’s Washington office, claimed (without anyone prodding him to do so), “There was no connection between the contributions and the statements.” Heaped on this insult, another lobbyist commented, “This happens all the time. There’s nothing nefarious about it.”8

On the contrary: The fact that it happens all the time is precisely what is nefarious about it. But yes, it’s true: Few in Washington politics care these days, and even the mainstream media seems bored with it. As Fred Wertheimer put it recently, “That’s the beauty of the system for these guys. This is a legalized bribery kind of system where no one has to say anything. I don’t have to say what I want—you know what I want.”9 Indeed, you have to do something genuinely illegal, and of truly gargantuan, Jack Abramoff/Michael Scanlon proportions, to get any serious press attention at all. And in the Abramoff case even that took years.

Even worse perhaps, lobby moneymen deliberately write laws and regs in such a convoluted fashion that ordinary mortals—to include most Congressmen, by the way—cannot understand them. That means that the given area of public policy being affected by the law or the regulation ends up being affected in ways corporate donors understand better than anyone else. It also means that in public policy domain after domain the rules are written in such a way that large organizations are advantaged over smaller ones. This is true in business and banking culture; it is true when it comes to laws pertaining to charities and foundations; and one could go on and on.10 The basic effect is to help large, often self-satisfied organizational leaders to gain leverage over their smaller, hungrier and frequently more innovative competitors. This in turn helps to explain why all the various well-intentioned and sometimes eloquent pleas from public intellectuals and scholars—that we invest in the future again, like we used to do—in infrastructure, education, research and development, and so on, and that we stop throwing money at present and past legacy obligations—are sort of beside the point. It’s not as though as a society we have become that much stupider than our forbears; it’s because we have become that much more corrupt.11 We don’t do the right things not because we don’t recognize they’re right, but because the interests of the political class run in the other direction.

This process of deliberate obfuscation that tends to reward bigness has several layers of impact. In banking, for example, the crowding out of local banks by the hypermarkets that buy and sell mortgages has all but eliminated the restraints against fraud and shysterism that inheres in the moral bonds of local community. A banker or a broker is a lot less likely to screw a client if his kids and their kids play on the same little league or soccer team, go to the same church, or belong to the same golf club.

This dynamic, which depends on the effective delegation of lawmaking functions to a large and essentially unaccountable administrative bureaucracy, describes not only the workings of the interest-group-friendly logic of collective action, but at least part of the anatomy of what is known as regulatory capture—the phenomenon wherein the domains of the private sector being regulated by government end up in effect as the bosses of those who regulate them. The result is that for all practical purposes we do not have the rule of law in the United States anymore, but the rule of (corporate) lawyers. This is not piles of cash being handed over in brown paper bags, but it is corruption all the same.

Similarly, by plutocracy it should already be evident that I do not mean simply that wealthy people tend to end up being the rulers. By that definition, just about every political regime since the Flood has been a plutocracy, and it is no help whatever to lump such disparate phenomena together. Rather, I mean a political circumstance in which wealth manages to produce conditions conducive to its own preservation and extension. As best I have been able to figure out, there are only five taxonomical categories that define these conditions. 12

First, plutocracy is characterized by getting taxpayers to finance the cost of industry regulation instead of the profitable industries being regulated. A good example, and a very old one, is the relentless refusal of corporations, via their rented politicians, to pay any of the price of business activity, like pollution or any form of environmental remediation.13

Second, in a plutocracy the legal structure of taxation and the terms of debate pertaining thereto advantage the wealthy at the expense of others. This is exactly the concern voiced by Madison in Federalist No. 10, when he defined a faction as “a number of citizens . . . who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community.”

Third, in a plutocracy money regularly skews electoral politics. In this post-Citizens United year of super-PACs, no more need be said about this.

Fourth, plutocrats seek to ensure maximum feasible lobbying, because the ability to lobby to the best of one’s ability and wealth is the ultimate guarantor of the prior three forms of plutocratic influence. The Supreme Court’s interpretation of the First Amendment over the years has made that relatively easy.14

And fifth, in industrial democracies large corporations use their influence to guarantee a dominant share of government contracting monies, and in so doing are often able to devise barriers to entry to keep potential competitors at a disadvantage. That, obviously, is economically inefficient for the economy as a whole since it retards the engines of creative destruction as well as fuels inequality.

This fifth category may be the oldest of the five, at least in the U.S. example, but it is also in some sense the newest. Let me explain.

Government pro-corporate paternalism has existed since the Civil War era and grew to its basic shape because of and during that war. President Lincoln warned against it five months before he died, and it is worth listening to what he said:

I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. . . .

[C]orporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.15

After the war the trusts did indeed form from their wartime expansion and links to government, and already 120 years ago Americans were railing regularly (though not regularly enough, evidently) against, in the words of Hamlin Garland, the sort of corporate power that depends not on the absence of “paternal” government but on its presence in the form of favorable tax policy, subsidies, land grants, huge construction contracts and other forms of assistance. Government, Garland charged, had “fathered” a great concentration of wealth, creating “vast corporations and privileged classes” and even the “giant corporations to dominate our legislature.” Its intervention had undercut competition and created “the trusts.”16

A century and more after the railroad barons and oil trusts, the privileged position of several major American corporations—General Electric and Lockheed-Martin are pertinent examples—still depends in part on government contract work in both defense and non-defense sectors. But what is new about this oldest form of American plutocracy is the enormous increase in the ratio of public to private spending within the economy. In the 1900s, government at all levels accounted for about 10 percent of GNP. By the early 2000s that number had risen to 32 percent, and today it stands at about 40 percent. This is what whale-hearted administrative bureaucracies create when left to expand according to their own self-interested and open-ended logic. With the ratio of private to public spending falling from 9:1 to 3:2 in just over a century, corporations would be crippled without active lobbies to grab part of that public spending.

***

Speaking of inequality, as I have done so far in passing, let me now distinguish my view of this problem from what has lately become the most popular view. The most popular view, on display in recent books by Joseph Stiglitz, Timothy Noah, Jacob S. Hacker and Paul Pierson, and Michael J. Casey, among others, is that corruption is all about inequality. Corruption causes inequality—it’s the rich taking from the poor—and inequality is the toxic substance most threatening to American society because it makes us as a nation less efficient economically. This is George Stiglitz’s argument in particular.

I disagree. Plutocracy does exacerbate natural inequalities in a market economy, and that does dampen efficiency, yes. But plutocracy’s worst effects concern the paralysis of public policy writ large. We cannot deal with the real sources of escalating health care costs, to the point that major politicians don’t even discuss them. We cannot properly invest in infrastructure. We cannot do much of anything about our educational deficits, or the counterproductive way that the student loan system discourages creative risk-taking by young people and makes their path to middle-class status increasingly parlous. We cannot reform the absurd drug laws that paralyze our penal system. We cannot agree on revamping immigration policy. We cannot rationalize agricultural policy, improve the way we regulate and approve new pharmaceuticals or deal comprehensively with the way we handle food safety issues.17 Above all, we cannot seriously brake the dangerous risk-taking behavior of the financial industry (how Wall Street lobbyists, using Senators and Congressmen as front-men, have vivisected the so-called Volcker Rule is a stunning case in point17), or reform either the tax code or the campaign finance system. And all of these incapacities come down to the same cause: There is way too much corporate lobbying money in all the wrong places in my hometown, Washington, DC. Hell, we can’t even fix the Post Office.

There is no need to repeat here the reams of data charting the rise of the number of registered lobbyists or the escalating ratio of money spent per Congressman. It’s all out there and easy to find. The most popular datum, perhaps, is the one that notes that there are 28 officially registered lobbyists for every single member of Congress. More important than static numbers, the trend curve these numbers describe looks like Jimmy Durante’s nose with head on a pillow. And now, thanks to Citizens United and lower court interpretations of it, we cannot control really at all the impact of money, not just on Legislative Branch elections, but even on the elections of judges in dozens of states. Because corporate money can now buy legislation, regulatory judgments in the Executive Branch and judges in the judicial branch, it can essentially lock in permanently the advantages of the most-wealthy Americans. That plutocratic hat trick has closed the circle, essentially short-circuiting any legal means of righting the tilted playing field.

There is now no realistic way, just to take one example, to close the gap between legal tax avoidance and illegal tax evasion. Just ask Senator Levin, who has headed the extremely under-populated effort to get at this problem for years now, with nothing whatsoever to show for it. This “gap”, by the way, sums worldwide to more than $30 trillion in offshore accounts alone.18 This gap will probably grow wider as even less fabulously wealthy Americans can afford, and will have an incentive, to buy tax letters to shield their income from the IRS and its counterparts abroad.19 We are therefore not so slowly but very surely creating the conditions for the rise of an American aristocracy, something we have arguably not had since before the days of Andrew Jackson, if we even had one then. This is the problem, not garden-variety inequality and inefficiency à la Joe Stiglitz, which are perennial conditions both of human nature and of market economics.20

As I have already suggested, there is anyway a vast misunderstanding afoot of the actual data on inequality. As Tyler Cowen has shown, the data set most people use to make assertions about inequality has been skewed dramatically by changes in the share taken by just the top half or even tenth of one percent in the United States—hedge fund managers and other winner-take-all financial industry heavy hitters who have learned to game the system. The income differentials in that top half of one percent are so huge that they skew the entire data set. (I will not repeat here the arguments that Tyler made; you can read them for yourself, and you should if you haven’t already.21) But the idea that wide strata of American society, say from the 50th percentile on down, have become absolutely poorer over the past three or four decades largely because they have been exploited by rich people (and which supposedly explains rich people’s riches), is primitive, and usually leftist, nonsense. Both their income and their wealth levels have continued to the rise over the past thirty years, though not as sharply as the echelons above them, and particularly the echelons at the very top of the income pyramid.22

And that does not account for the fact that income is not the same as wealth, and that neither income nor wealth equate to quality of life. The data do not account for declines in the real purchase price of some goods, and for the lower socio-economic brackets it does not factor in the considerable value of government benefits.23 Nor does it take account of the fact that there are many more threshold earners in the United States these days, people who are not trying to maximize income for a variety of social reasons: extended graduate school years, living alone, and so forth. Once one controls for these exogenous factors—once one applies a sociological filter to the economic data, in other words—most of the supposedly terrible things that afflict the great middle of the middle class by way of inequality wash out. Yes, inequality has grown statistically, but no, it doesn’t mean “in real life” what many observers say it means.

What’s really going on is subtler than that; it is captured in some of Robert H. Frank’s work. Frank, one of the new breed of “behavioral economists” (which, to my way of thinking, are just the micro-economists of old armed with new tools in a new context24), argues that status envy creates expectation cascades that cause those in lower socio-economic rungs to want to live like those in the socio-economic rungs above them.25 Fretting more about what they don’t have than feeling gratitude for what they do have, they go irresponsibly into debt trying to keep up with the Joneses. Some of this stretching is not irresponsible, of course, like parents wanting to give their children the best education possible, which sometimes means moving into the best school districts where real estate is very expensive. But a lot of it is, if not irresponsible, illustrative of the old adage that “want” has a way of transforming itself into “need” without anyone noticing the difference.

Closely related, Neil Gilbert has pointed out that the way the U.S. government measures poverty these days looks like something out of a funhouse mirror on stilts.26 It has more to do with satisfying the scions of the poverty industry bureaucracy and how their particular pieces of bread get buttered in the budget process than it does with anything having to do with poor people. There are people below the official poverty line who own their own homes (along with a bank, of course), have two cars, two or more television sets, more clothes than they can wear in any given year, and so much food (often of the wrong type) that obesity is a far more common problem than hunger. Not that hunger isn’t a growing problem, thanks to the bank-driven rise in commodity prices, among those who are really and truly, not just bureaucratically defined as, poor.27

What’s different about the current anxiety over inequality is how it’s being perceived. Traditionally, Americans have not gotten particularly annoyed by inequality, and the reason, often attested, is that for the most part they see it as a natural consequence of differential talent, virtue, effort and luck. As long as great gains were not ill gotten, most people have figured, hey, it could have been me, and it might be my kids. What Americans do not abide is a game that is fixed, a playing field that has been deliberately made not level. Inequality resulting from inside shenanigans tick us off today no less than they ticked off Mark Twain and others back in the post-Civil War era. Back in those days there was a reaction—the Grange, the Populist movement, eventually the Progressives, all the way to William Allen White, Theodore Roosevelt, and his trust busting. None of that banished inequality, and no one save the likes of Emma Goldman and Eugene Debs asked it to. What it banished was plutocracy—at least for a time.

Now the perception of inequality is returning to something like that of the Populist era, despite the fact that aside from the marginal and now terminally depleted Occupy Wall Street movement there has been no significant political mobilization to the left of center. Still, despite the widespread common-knowledge misunderstanding of what inequality actually is and means, there is still a rising sense that something profoundly unfair is going on. That’s why we are now beginning to see angry books along these lines, one entitled Greedy Bastard$!, and subtitled, for maximum bomb-throwing effect, “How We Can Stop Corporate Communists, Banksters, and other Vampires from Sucking America Dry.”28 Yet another claims that corporations constitute a separate political party in effect (but why is this necessary if corporate and financial plutocrats have already bought, or at least rented, the two major parties?).29 We have even reached a point where plutocracy is grist for commercial-publishing books long on historical gossip.30

There is a growing awareness, too, that the dark side of globalization and many manifestations of our political dysfunction are somehow implicated in this unfairness. It is one thing to expect and tolerate winners and losers in Schumpetarian creative destruction, another to tolerate a situation in which the power of plutocratic financial parasitism creates a tiny number of huge winners to the detriment of the vast majority—as when Wall Street manipulators managed to transfer some $6 trillion worth of home equity from middle-class borrowers into their own pockets before the fall of Lehman Brothers.31 Americans by and large are still fond of rich people and admire them, but they hate bankers like “Mr. Potter” from It’s a Wonderful Life. It is a sign of either our maturity as a society, or, I fear, of our near-total anesthetization by corporate-funded celebrity culture, that there isn’t more anger, and that so far we have experienced virtually no political violence on account of our circumstances. In many less well-institutionalized but professionally armed democracies, circumstances comparable to ours would have long since brought forth a military coup.

In sum, we can sum the three groupings of causation or explanation for what’s wrong and, even without plumbing deeper wellsprings of technological or related cultural change, come up with a synopsis of our “mess of a problem”, to wit:

• Changes in the underlying ratio of labor and capital inputs in the American political economy, thanks to globalization and automation, have advantaged the political power of capital—especially finance capital—even as it has disrupted the foundation of our politics and made all but obsolete our inherited ideological/explanatory templates.

• This has happened at the same time that our political institutions have ossified from within, especially on the bureaucratic/administrative level, a development abetted in no small part by the accumulated distortions of interest-group rentier politics in an increasingly top-heavy, unbalanced Federal system.

• That dysfunction, mightily exacerbated by the organized lobbying power of corporate interests, has given shape to the present wave of plutocracy washing over us. The depredations of plutocracy, in turn, double back in such a way as to render us unable to properly understand or deal with the structural economic changes we face, or to repair our political institutions.

In a nutshell, that—all that together—is what’s wrong.

Now, how do we fix it?

Notes:

1Packer, “The Broken Contract”, Foreign Affairs (November-December 2011).

2James Kurth, “The Foreign Policy of Plutocracies”, The American Interest (November/December 2011).

3Plenty has been written on this. Compare, for example, Joe Klein, Politics Lost (Broadway, 2007) and Robert G. Kaiser, So Damn Much Money (Knopf, 2009).

4Cited in Joe Nocera, “Buying the Election?” New York Times, October 9, 2012. Nocera is a Johnny-come-lately to this subject, but better late than not at all.

5I know what you’re thinking, but don’t: The Middle East and the Persian Gulf would be of strategic interest to the United States even were no oil to be found there, so it is not accurate to attribute mercantilist motivations to U.S. military activity there. That said, the oil does matter of course, but not in the sense of the “no blood for oil” or “war for oil” slogan—unless the sloganeer understands that, with petroleum of lifeblood of the global industrial and transportation system, every country benefits from the international public good supplied by the U.S. military, and the poorest countries and the poorest people benefit most. Note: In my experience, very few “blood for oil” sloganeers have the slightest notion of this. A good example is Dr. Jill Stein, the 2012 Green Party presidential candidate. She says this all the time, and all the evidence suggests that she has no idea what she is talking about here, though she makes good sense on other subjects.

6Incidentally, Congress did pass a law establishing E-ARPA (Energy Advanced Research Projects Agency) in 2007 with the express purpose to transcending the petroleum-dominated energy status quo. Unfortunately, it has been shockingly underfunded. Guess why. On the promise of flex-fuel cars, see Gal Luft and Anne Korin, “The Folly of Energy Independence”, The American Interest (July/August 2012).

7On Romney’s energy policy volte face from being Governor of Massachusetts to his run for the White House, see Sheryl Gay Stolberg, “Romney Shifted Right on Energy As Presidential Politics Began”, New York Times, September 30.

8Robert Pear, “In House, Many Spoke With One Voice: Lobbyists’”, New York Times, November 14, 2009.

9Wertheimer quoted in James Bennet, “The New Price of American Politics”, The Atlantic, October 2012, p. 74.

10For examples of the former domain, see Sebastian Mallaby and Matthew Klein, “Hedging Risk”, The American Interest (January/February 2011); and for an example of the latter domain, see Ellen P. Aprill & Richard L. Hasen, “Lobbypalooza”, The American Interest (January/February 2011).

11An eloquent example is Thomas Friedman and Michael Mandelbaum, That Used To Be Us (Picador, 2011). It is odd, however, that this book underplays plutocracy as an explanation for why we don’t do the things we obviously need to do, since Friedman, at least, has made multiple references in his New York Times columns in recent years to the overweening power of interest-group money in American politics.

12Explained in my “Terms of Contention”, The American Interest (January/February 2011).

13The classic argument, first published in 1950, is K. William Kapp, The Social Costs of Private Enterprise (Schocken, 1971).

14See Aprill & Hasen, “Lobbypalooza.”

15From a November 1864 letter to Col. William F. Elkins.

16Fore more detail and both bibliographical and biographical information about Hamlin, see David Green, “A Call to Linguistic Disobedience”, The American Interest (July/August 2012).

17An excellent example here is that the FDA during the George W. Bush Administration proposed banning a class of antibiotics from animal feed (cephalosporins), but President Bush overruled his own agency when the cattle lobby and Big Pharma objected.

18Interesting in this regard are the efforts of Senator Scott Brown of Massachusetts. See Ben Protess, “Behind Scenes, Some Lawmakers Push to Change the Volcker Rule”, New York Times, September 21, 2012.

19James Henry, “The Price of Offshore Revisited”, Tax Justice Network, July 2012.

20On tax letters, see Jeffrey Winters, “Oligarchy and Democracy”, The American Interest (November/December 2011).

21The question of unequal political voice in American politics is newly addressed in Kay Lehman Schlozman, Sidney Verba and Henry E. Brady in The Unheavenly Chorus: Unequal Political Voice and the Broken Promise of American Democracy (Princeton University Press, 2012), and in Martin Gilens, Affluence & Influence: Economic Inequality and Political Power in America (Princeton University Press, 2012).

22Cowen, “The Inequality That Matters”, The American Interest (January/February 2011).  See also Kip Hagopian & Lee E. Ohanian, “The Mismeasure of Inequality”, Policy Review (August/September 2012) for a somewhat different take on the subject.

23How one states the facts here depends on a range of assumptions. Another way to look at this is that median household income has risen slightly since 1973 (in the 1–3 percent range depending on the base year chosen) but not at all since the late 1990s. But there have been no absolute declines in median income before just the past two or three years. The estimated decline for 2011 is 4 percent, and that is distressingly large.

24One reason is that there are disputes among and between bureaucrats and clients about what these benefits are actually worth. See “Health Care As Income For the Poor”, New York Times, October 3, 2012.

25To fully explain this comment I would need to discuss how political economy as a discipline got bifurcated early in the 20th century into political science on the one hand and economics claiming to be a positive (that is, value-free) science on the other. It was only some time after that bifurcation that economics began to sharply privilege macroeconomic approaches. In the process classical economics increasingly isolated itself from the rest of the social sciences. This entire development has been disastrous, and it bears on Dr. Fukuyama’s emphasis, noted below, on the damage that classical economic epistemological premises and terminology have done. But this has to do with some esoteric history in the sociology of science, and this is no place to lay it out. Nevertheless, for those who wish to pursue the matter, an excellent summary of the dialectical relationship between theory and methodology in postwar economics, and how the latter largely drove the former, may be found in Daniel Bell, The Social Sciences Since the Second World War (Transaction, 1982), pp. 23–30.

26Frank, Falling Behind: How Rising Inequality Harms the Middle Class (Universityof California Press, 2007).

27Gilbert, “What Poverty Means”, The American Interest (July/August 2012).

28According to USDA figures, a record number of Americans now face literal food insecurity—14.9 percent of all households, totaling some 50 million people. I confess I have a hard time believing such outsized numbers.  See Pam Fessler, “Record Number of U.S. Households Face Hunger.”

29The reference is to Ratigan, Greedy Bastards, cited above in note 8.

30W.D. Wright, The American Three-Party System: Hidden in Plain Sight (AuthorHouse, 2012). The argument that both parties have already been captured by business interests is theoretical turf identified with Thomas Ferguson. See his Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems (University of Chicago Press, 1995).

31Chrystia Freeland, Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (Penguin, 2012).

32Argued by Hedrick Smith in Who Stole the American Dream? (Random House, 2012).

show comments
  • Anthony

    “Latter day discourse on the economic system as something separate merely because it can be analytically isolated bypass the inescapable fact that there is always persent a politico-economic system: government with economic ramifications, an economy with political ramifications.” Now, how to fix it begs the question that benefactors thereof will not counterpose said reckoning – where will it all end? what will be the historical outcome of the concentration of wealth and power in the United States? All the while acknowledging our parlous present circumstances and the variance created by globalization/automation, political/institutional dysfunction, and corruption/plutocracy being facts of social order.

    Reducing government (establishing new forms of shareholder capitalism) may or may not be step in devising a new form of social contract compatible to 21st century social patterns/dynamics; but if it provides means to reduce power of money in politics then reducing volume of what’s worth buying needs curtailing post haste. Now, how do we do that?

  • http://policytensor.com Anusar

    Excellent post Adam. The fix coming up in part 4?

  • TomK

    Great article!

    It is a pleasure to hear the strength of traditional conservatism speaking out against plutocracy and corruption.

    What still rings of the current ideological divide, however, is the scepticism towards good government, whose role is to level the playing field, protect the poor and support communities while subjecting businesses to honest competition–especially in the sustainable conservative self-understanding of the past.

    As long as conservatives continue to slander government instead of formulating a positive vision, including its necessary role in acting socially responsibly and levying sufficient taxes, they weaken it to fight against corruption. I suspect that that the anti-government frame is the keystone in the lobbyists efforts to end any centralized resistance to their influence.

    Would the way out lie in renouncing the belief that government is the problem, and working out how government might be the solution? Beyond the spin of the corporations, there is certainly a centrist consensus on what the pillars of that function could look like.

  • Helge

    Thank you for your deep and insightful articles. I really enjoy reading them.

  • Craig Shelton

    “What’s Wrong and How to Fix It”

    I would tend to diagnose the problem in a politico-economic frame of reference as well.

    1. The nearly complete transference of tax burden from property (70% of all govt. revenues in 1930) to labor (income tax, sales tax, employment tax) has ensured a British-style banking industry which instead of enabling true economic growth, exists to extract maximum gains from asset inflation and has artificially inflated the value of capital while simultaneously artificially finishing the value of capital formation and labor. This in contrast to what might have been a set of policies encouraging Industrial Banking, where the focus would have been on creating new capital goods, rather than merely inflating the price of existing assets.
    2. Tax deductions for mortgage interest, tax-free capital gains on up to $600K every two years and other such policies amplified the effects of core policies.
    3. Monetary policies since 1995 gave exorbitant fuel to create a massive bubble.

    These government policies created tremendous incentive to misallocate capital in every sphere of economic activity and more importantly set a squeezing out of artificial rent from the entire productive economy and younger households and transferring it to the finance, real estate and insurance sectors. The “playing field” has been made very uneven across the spectrum of industries.

    Over the last three generations, these policies have caused the cost of housing to rise at a far greater rate than inflation. I beleive that this unprecedented generational transfer of wealth was a paramount cause of the growing wealth disparity in classic Ponzi fashion.

    Possible solutions:
    Relevel the playing field so everyone can win again.
    A. Restructure tax code toward greater neutrality by phasing out asset bubble inducing features. A flat tax with few deductions, phasing out mortgage interest deduction gradually, instead of our current crony capitalist tax code.
    B. Rebalance the burden of taxation so it is more evenly spread over both capital and capital formation. A very mild type of wealth tax might be considered.
    C. Equalize the tax burden of employment taxes by shifting the allocation from its current “per employee” basis over to a straight percentage of sales in order to equalize the playing field.
    D. Retract dual mandate and replace with a more conservative Federal Reserve policy akin to Taylor Rule. Keep the dollar strong to protect people on fixed income.
    E. Consider a public-private initiative to create an industrial banking sector in America. One might consider giving tax advantage to debt used for creating new capital goods over merely inflating existing ones.

    These core changes could yield a political environment where fiscal discipline is more palatable by both sides of the aisle.

    Warm regards

  • Craig Shelton

    That should have read “diminishing” rather than “finishing”.

    Apologies.

  • http://lancasteronline.com/blogs/smartremarks/ Gil Smart

    How do we fix it? We don’t fix it. The power players are too entrenched; “fixing” it requires some of them, at least, to loosen their stranglehold on wealth and power, which they’ll never do.

  • http://scottlocklin.wordpress.com Scott Locklin

    1976 Campaign cost $70million in 1976 dollars. That’s about $300 million today. Normalize to the relative populations, and it doesn’t seem like they’re spending all that much more money today.
    Not that the US isn’t an absurd plutocracy, but I think the gas expended on campaign finance is a distraction from the real issues.

  • http://www.facebook.com/profile.php?id=100003407284704 Razvan

    Well, legally they do. International human rthgis law, national bills of rthgis or human rthgis acts, criminal law etc. all guarantee the right to property, with stiff penalties for violating it. Of course, morally or philosophically it’s a different matter. Locke is famous for his philosophiocal justification of the right to property (see here if you want: ), but I don’t think it’s waterproof. The best defense of property I can think of is it’s importance for the right to privacy (see the same link). If you think privacy is important, it’s hard to see how you can reject the right to property. Much depends also on the origins of property. We all know that part of out property even yours and mine originates from colonial exploitation and others types of injustices. Property in general can be justified, but once you start to look at specific property, you quickly unearth injustices that undue the right to a specific set of property.

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